KNOWLEDGE CENTRE

Knowledge Centre Archive

Sep
14
2011

August 2011 Market Update

  • Global equity and bond markets experienced a dramatic and highly volatile August. 
  • The markets witnessed a strong flight-to-safety and equities sold off while government bonds benefited. 
  • Economic indicators continued to disappoint on the whole, but SEI remains optimistic in the longer-term.

Global equity and bond markets experienced a dramatic and highly volatile August. The markets witnessed a strong flight-to-safety throughout the month, with investors shying away from risk in favour of defensive assets. In this environment, equities sold off seemingly indiscriminately, while gold and fixed income—particularly government bonds—benefited. Already poor market sentiment was pushed lower by ongoing U.S. debt issues and renewed concerns about the eurozone.

Economic Backdrop

Despite a resolution to the debt ceiling debate, the U.S. remained the focal point of investor unease in early August. The debt ceiling reflects the maximum amount of money that the U.S. government is allowed to borrow. After months of political wrangling, a last-minute deal was finally reached to raise the debt ceiling at the start of the month. However, the solution was viewed as incomplete and temporary by market participants, who recognized that the agreement did not tackle longer-term debt issues. As a result, credit-rating-agency Standard & Poor’s responded by lowering the U.S. government’s longstanding AAA rating to AA+. However, the other major rating agencies, Moody’s Investor Service and Fitch Ratings, did not change their ratings on U.S. debt. The news of the downgrade panicked investors, led to heightened volatility in the stock markets and helped to fuel the flight-to-safety.

Troubles in the eurozone again made headlines in August. In an effort to stem concerns surrounding the eurozone’s sovereign debt crisis, another wider-ranging bailout package had previously been agreed upon in late July. The deal largely pertained to Greece, but also offered concessions to Ireland and Portugal, and granted the European Financial Stability Fund permission to buy Spanish and Italian bonds in order to help provide credit to these countries. News of the bailout did little to convince investors that recovery was imminent, and fears continued to spread to other eurozone countries. Italian and Spanish government debt thus came to fore in August, and the markets began to demand historically high interest rates for taking on their debt. In an attempt to ease the crisis, the European Central Bank (ECB) began to purchase sovereign debt from both these countries (along with government bonds from Ireland and Portugal). France also came under scrutiny during the month. Despite the fact that Standard & Poor’s recently affirmed France’s AAA credit rating, rumours began to circulate that French government debt was at risk of a credit-rating downgrade and French banks came under pressure due to worries over their exposure to Greek debt.

Weak economic data releases also rattled investors during the month. Statistics Canada reported that Canada’s real gross domestic product (GDP) moved 1% lower in the second quarter, mainly due to a drop in exports. This is the first quarterly real GDP fall since the 2008 to 2009 recession. Second-quarter GDP figures were also lower than hoped for in the U.S., eurozone and U.K. Other economic indicators further suggested that the global economy was struggling, and bad news in the U.S. was particularly troubling. For example, the Institute for Supply Management Index for manufacturing came in at 50.6 in August; marginally above the critical level of 50 (anything below this signifies contraction). Canada’s unemployment rate rose by 0.1% to 7.3% in August, according to Statistics Canada. This was the first net loss in five months, with the construction industry being the hardest hit. U.S. non-farm payroll data, which measures employment levels excluding farm, government and private household workers, remained unchanged for the month, with the total jobless at 9.1%. Unemployment levels continued to hover around 10% in the eurozone, and rose to 7.9% in the U.K. The Bank of Canada held the country’s benchmark interest rate at 1% for the eighth consecutive time. The decision was due to concerns surrounding a slowing global economy. This is in line with most other central banks, which have continued to maintain interest rates at historic lows to help stimulate growth.

Market Impact

As market volatility increased, bonds were favoured over equities. Reflecting this flight-to-safety, global government bonds performed best. However, corporate debt struggled and riskier fixed income—high-yield debt, which is rated below investment-grade—lagged notably in comparison. Within government bonds, yields in general fell as demand increased. This was particularly the case for U.S. government debt as investors continued to express a preference for this traditional “safe haven.” Ironically, it was Standard & Poor’s downgrade of U.S. government debt that initially helped trigger panic among investors. The government debt of struggling European countries, namely Spain and Italy, bucked the trend and yields rose in early August due to falling demand. However, this was reversed after the ECB began purchasing Spanish and Italian debt and yields began to fall by month-end. High-yield bonds performed particularly poorly in August, with prices falling and yields rising significantly, marking the worst monthly performance for the asset class since November 2008.

Equity markets experienced the brunt of continued market uncertainty in August and declines were witnessed almost across the board. Volatility peaked during the middle of the month when stock markets across Europe experienced their biggest one-day losses since 2008. In a month in which most countries experienced falls, eurozone nations struggled the most and Greek equities were particularly hard-hit. Globally, pro-cyclical sectors, which tend to do well when confidence is high and economic growth is anticipated, sold off the most in August. More defensive sectors, like Consumer Staples, fared better. The Energy and Financials sectors lagged notably, the latter largely because of worries about banks’ exposure to eurozone government debt. Energy struggled as oil prices fell on the back of global growth worries.

Index Data 

  • The S&P/TSX Composite Index returned CDN -1.21%. 
  • The DEX Universe Bond Index advanced by CDN 1.18%. 
  • The MSCI AC World Index, used to gauge global equity performance, fell by USD 7.31% in August. 
  • The Barclays Capital Global Aggregate Index, which represents global bond markets, gained USD 1.27% over the month.
  • The Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” increased from 25.25 to 31.62 during the month, but reached 48.00 on August 8. To put this into context, the VIX went as high as 81.48 in 2008 when Lehman Brothers collapsed. 
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, declined from USD $95.70 a barrel at the end of July to USD $88.81 by August 31. 
  • The euro strengthened against most currencies in August, although it declined against the Japanese yen. The U.S. dollar fell against the euro and the Japanese yen, but gained against sterling. The U.S. dollar ended the period at $1.63 against sterling, $1.44 versus the euro and at 76.47 yen.

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is for educational purposes and should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. There is no assurance as of the date of this material that the securities mentioned remain in or out of the SEI Funds. There are risks involved with investing, including loss of principal. Diversification may not protect against market risk. There are other holdings which are not discussed that may have additional specific risks. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Bonds and bond funds will decrease in value as interest rates rise. Information contained herein that is based on external sources is believed to be reliable, but is not guaranteed by SEI, may be incomplete or may change without notice. SEI Investments Canada Company, a wholly owned subsidiary of SEI Investments Company, is the Manager of the SEI Funds in Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or any other government deposit insurer. The information contained herein is for general information purposes only and is not intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional.